Newmont Mining Q4 2015 Earnings Review: Lower Gold Prices Negatively Impact Results
Newmont Mining (NYSE:NEM) announced its fourth quarter results on February 17 and conducted a conference call with analysts the next day. [1] The company’s results were negatively impacted by the decline in gold prices over the course of 2015. Newmont’s adjusted net income, which excludes the impact of non-recurring items on earnings, declined to $20 million in Q4 2015 from $86 million in the corresponding period last year. [2] The most important takeaway from the earnings conference call was the management’s continued focus on building a portfolio of low-cost, long-life mining operations, in order to position the company to operate profitably in a variety of gold pricing environments. [1]
Decline in Gold Prices
Gold Prices in 2015, Source: Kitco
Newmont’s average realized price for gold sales stood at $1,084 per ounce in Q4 2015, around 9% lower on a year-over-year basis. [3] The decline in gold prices over the course of 2015 was largely due to concerns over a potential interest rate hike by the Fed. From an investment point of view, gold is generally considered a safe haven asset, with investments in the metal made primarily with the purpose of hedging against economic uncertainty and inflation. An improvement in economic conditions lowers the investment demand for gold. In addition, since gold does not offer any returns besides capital gains, investors tend to shift away from gold towards interest-bearing assets with an increase in interest rates. Fears over an interest rate hike, which ultimately materialized in December, weighed on gold prices in Q4 2015.
Gold prices have recovered somewhat lately as a result of increased risk aversion among investors due to uncertainty over the strength of global economic growth. Prices may remain elevated if global macroeconomic uncertainty persists.
Cost and Capital Expenditure Reduction
Operational improvements and favorable currency movements helped lower Newmont’s all-in sustaining costs (AISC) metric by 10% year-over-year to $898 per ounce for the full year 2015. [3] However, a decline in production at the maturing Yanacocha mine, and the unfavorable timing of sustaining capital expenditure, translated into an 8% year-over-year increase in AISC in Q4 2015. [3] AISC is a comprehensive measure of the overall costs required to sustain a company’s ongoing mining operations.
The company management stated that Newmont intends to continue to align its portfolio of mines towards low-cost, long-life assets. The divestments of the high-cost Midas, Jundee, Penmont, and Waihi mines, and the acquisition of the low-cost Cripple Creek and Victor mine, are instances where the management has put its stated plans into action. [3] Furthermore, investments into the Merian and Long Canyon projects will ensure a steady pipeline of low-cost production in the future. Focusing on a smaller pipeline of projects, in addition to the rationalization of sustaining capital at existing mines, will help lower Newmont’s capital spending in the coming years, as illustrated by the decline in the company’s projected future capital spending. [3] These measures will help Newmont further shore up its cash flows in an uncertain gold pricing environment.
The series of steps taken by Newmont Mining to lower costs and capital spending will transform it into a company that is better suited to operate competitively in a variety of gold pricing environments. Not only will these measures help Newmont weather short term fluctuations in gold prices, these steps would also better position the company to take advantage of a recovery in prices.
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Notes:
- Newmont’s Q4 2015 Earnings Call Transcript, Seeking Alpha [↩] [↩]
- Newmont’s Q4 2015 Earnings Release, SEC [↩]
- Newmont’s Q4 2015 Earnings Presentation, Newmont Mining Website [↩] [↩] [↩] [↩] [↩]